Valuationbasics,AsiantigersandMichaelLewis

Yesterday we had written about how close Dow was to its pre pandemic highs and what that fact signifies for the wider global markets. The essential message was that stock markets have discounted the good news. Continued stimulus and a successful vaccine become the base case scenario. Here it is important to again revisit the theory behind any kind of move in equities, the free cash flow which a business would acquire over the coming years will accrue to the shareholder. As the discussion is about the future, that FCF needs to be discounted to the present value. Optimism about the amount of free cash flow and a belief that we will be able to discount it at perennially low rates fuels the euphoria in stock markets. In case of bond prices, also the same phenomenon works just that the future cash flows in case of bonds are cast in stone (in case of low default risk) and are not volatile like equity FCF.

Return on currencies and their future values are a totally different game altogether as everything about them is relative. The movements in the currency markets can be totally extraneous to the domestic events. Sometimes the foreign investors can decide the fate of the currency by being extremely bullish or bearish. The investor at the foreign shore might look at the pack of currencies in terms of a “bloc” which deserves the same treatment irrespective of their nationality. The words like “emerging”, “frontier”, “BRICS”, “Asian tigers”, “PIGS” etc somehow tie the fate of the currencies which have been grouped together.Michael Lewis in his book Panic describes this phenomenon at length in a chapter named Foreigners gone Wild. Lewis writes that the Asian currency crisis in 1997 was started when the Thai govt decided to devalue the Baht by abandoning its policy to sell dollars in the open markets. This event which was a decision by one South East Asian country resulted in money being pulled out from South Korea, Indonesia, Malaysia and the Philippines triggering a free fall of these currencies. The individual policies of the countries hardly mattered. Hence when we write that risk on tide has helped the EM boats, the reverse is also true. Also as is in human nature and is amply reflected in market gyrations, the journey southward is much more sudden. Evolution wise we are programmed to respond to threat much faster.

Let’s give this historical narrative a dose of current context. FPI investments into India have seen a strong uptrend, the month of November itself has seen close to 25k Cr INR (3.4 bn $ app) flow in Indian equities. The total figure for the complete last month was 18.4k Cr INR. Another example, foreign inflows into Malaysia also for July to Sep quarter (5 Billion Malaysian Ringgit) were two and half times of Apr-June quarter. The tide is rising.

As of today’s market roundup. INR is at 74.40, 10 year at 5.91. The Euro and sterling at 1.1777 and 1.32 respectively. Dow closed marginally in red. Nikkei and Hang Seng are in same zone. Gold is down by 10 dollars and Brent crude trades at 41.60$/bbl.